The Energy Space

The deja vu trade appears likely to remain in tact in the near-term, as recently attained bullish momentum was undercut in yesterday's trade. The resulting sideways trend will oscillate between moments of euphoria and doubt, which may essentially feel like a repeat of the decisive rallies and selloffs of the last few weeks which were believed to be the beginnings of new breakouts and breakdowns. Recent bullish momentum had been sparked by improved economic data in China and Europe, weakness in the dollar, accommodative Fed policy, and recent oil production declines by Saudi Arabia. Those were undercut yesterday by weak German GDP, a potential downgrade of the U.S. debt rating, and comments from EU's Juncker who said that the euro is dangerously high. The bottom line between these ups and downs is that the market has almost gone nowhere in Brent and slightly higher in WTI. Expecting that trend to continue may be the best assumption going forward. We favor holding our June WTI-Brent trade entered on Jan 4th at -$14.25 with a target at -$8.00. In the event of a selloff in WTI, we would look for a rebound after a test of the $91.50 level. We would also anticipate a shrinking of the WTI futures contango. APIs were a bit bullish yesterday afternoon.

WTI futures settled 86 cents lower yesterday while Brent finished down $1.58. The Feb Brent futures make their last trade today. At the start of the session yesterday, some support was provided by another gain in China's Shanghai Composite and a report that China's power consumption could rise 9%-10% this year compared to 5.5% last year (chart). The sense that China's economy bottomed last August along with the HSBC PMI level has been a primary driver of the oil price rally recently, as imports from the country have been firm as well. China's implied demand figures reached 10.50 mb/d in Nov, which was a new record high. The small overnight rally reversed when the euro currency turned lower following Germany's reported preliminary 2012 GDP figure at just +0.7% compared to 2011's +3.0% and 2010's 4.2%. The euro fell despite Fitch reporting that Spain may not activate the OMT at all in 2013. Further pressure was added late in the session by EU's Juncker who said that the euro exchange rate is dangerously high.

Additionally two-sided were developments from the Fed, which embarked on a grand new QE program only to undercut it in the FOMC minutes by saying that policy could be tightened before its 2015 target. Dovish Fed presidents have recently voiced concern about the effects of the growing Fed balance sheet even though they were in favor of the action a couple months ago. Saudi Arabia has done something similar by reducing output nearly 1.0 mb/d to 19 month lows at 9.025 mb/d. That was interpreted as an attempt to boost prices to maintain social programs in the country, but Saudi Arabia clarified that on Monday to suggest it was just preventing an inventory buildup during a seasonally weak period of demand.

Natural Gas

February futures finished 8.2 cents higher yesterday amid strength in the front-end of the curve. The focus again was on colder temperatures that are predicted to make their way across the Midwest and Eastern portions of the country between Jan 20th-24th. Low temperatures in Chicago are forecast to reach 5 degrees during that time. The updated 6-10 day showed a higher probability of cold in the northeastern portion of the country, although the 8-14 day was generally similar. A key question though will be whether this bout of cold weather is a new norm or only a temporary event. Forecasts in several Midwest cities show much warmer temps both before and after the cold spell next week. The market may have to wait for Thursday's long-term update from the Climate Prediction Center for more clarity. In its last report, it showed temps in January that were above-normal across the eastern two-thirds of the country. The 2-4 day cold spell next week may not be enough to substantially reduce stocks of natural gas unless it were to linger.

Prices have rallied more than 40 cents off the Jan 2nd low at $3.05 in the last two weeks. The rally looks impressive on the chart, but there are still clouds on the horizon for the uptrend. There is strong resistance from Dec 21st high at $3.532 as well as from the 50-day MA at $3.56. The market also hasn't seen an accompanying increase in open interest or a notable liquidation in the net-short currently held by non-commercials and managed money accounts. Pressure could also come from potential increases in production as signaled by gains in rig counts since the w/e Nov 2nd. Our forecast for inventories this week is a draw of 129 bcf which would compare to the five-year average decline of 144 bcf. Our end-of-season forecast is 2068 bcf and compares to the five-year average of 1714. The bottom line is that even with short bouts of below-normal temperatures, inventories are on tap to end the withdrawal season with above-normal stock levels. We'd look for potential bearish action close to the $3.53 resistance level this week to think about a possible short position.

Global Economic & Dollar News

» China's Power Consumption may rise 9%-10% this year, which is faster than 2012's 5.5% growth.

» China's Gov't has pulled government automobiles off the road and closed dozens of factories in order to cut down on record-setting pollution levels.

» China's Gov't told the PLA to prepare for war in 2013. Japan wasn't mentioned but is likely the target, as the two countries have territorial disputes over the Diaoyutai islands.

» Germany GDP was -2.0% in Q4. The full-year 2012 preliminary figure was +0.7% vs. +0.8% expected. That also compared to +3.0% in 2011 and +4.2% in 2010.

» Spain may not activate the OMT in 2013, according to Fitch.

» The Debt Ceiling may be raised for four years based on a deal that would get republicans major tax and entitlement changes, according to Roll Call.

» Fitch said that it will launch a review of the U.S. credit rating if the debt ceiling isn't raised in a timely fashion.

» The CME clarified its ULSD heating oil contract to say that the specification will change to Colonial 62-grade with the May 2013 contract.

» Phillips 66 Wood River Refinery returned its crude unit to service at its 356 kb/d facility after an electrical fire on Jan 12th.

Upcoming Events

Wed - Iran-IAEA Meeting

Wed - EIA Weekly Oil Inventories (10:30am EST)

Thu - IEA's Monthly Report

Thu - CPC Monthly Weather Update

Thu - Natural Gas Inventories (10:30am EST)

Sun - German Local Election

Tue - Israeli Election

Tue - Last Trade CLG3

Tue - API Inventories (4:30pm EST)

Jan 29-30 - FOMC Meeting

Feb 12th - EIA's Short-Term Outlook

Feb 24-25 - Italian election

Mar 1st - Sequester Begins

Mar 14th - Debt Ceiling

May 31st - OPEC Meeting

Analysis

EIA Inventory Preview

The oil stocks number this week may reflect a more decisive change in direction from recent weeks where oil stocks fell sharply and products witnessed strong increases. Oil stocks typically gain throughout the first five months of the year after liquidations take place in December. If that's indeed the case again this year, oil stocks could witness a larger increase than that suggested by the five-year average as late-2012 conditions unwind. An 11.1 MB drawdown was reported in the last week of December and reflected refineries' intentions to convert raw crude into products. A slowdown in utilization coupled with high levels of imports should create an above-average increase this week. Cushing stocks could increase again this week, as the Seaway pipeline was closed for part of the week in front of Friday's ramp-up. Cushing should level off or begin to fall with next week's data.

Gasoline inventories have gained 10.0 MB in the last two weeks while distillates increased 11.4 MB. High levels of utilization have been partly to blame and should begin to pull back a bit this week, in our view. Lower levels of production should add pressure to stocks, but demand has been weak as well and may prevent a drawdown. Distillate stocks have benefitted from higher production and weak demand but may receive pressure this week from lower production and continued exports.

Natural gas inventories are expected to be -129 bcf. NOAA's HDD calculations were between 179 and 199, which compares to the previous week's 238. Last week's draw of 201 bcf was at the larger end of the consensus range, and was a bit higher than our model had predicted. There could be a small amount of retrenchment in this week's figure as a result. Temperatures were above-normal in the northern Great Plains during the survey week and may help to dampen the withdrawal. The east coast saw near-normal temperatures.

*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures

Grains Commentary

Published Tuesday morning, 1/15/12

The overnight markets once again give a little for everyone as decent swings were seen throughout the evening session. The beans have rallied nearly $1 since last Friday and they had the least impact from the USDA while corn has gained only 40 cents. So what should be done now?

The market knows that its job now is to ration demand somehow someway in both beans and corn but with profitable margins in nearly every corner it's difficult to see where the rationing will take place anytime soon. The poultry and hog markets are profitable for corn, the ethanol margin has improved over the past few weeks (still negative but improving, the new crop margin is already profitable) the export markets are still stagnant which at this point is a blessing. If the US becomes competitive in the export arena for corn then the candle might be lit for a run back to contract highs. The beans continue to do more business than is needed and with articles being blasted out everywhere showing how good the Chinese crush margins are its difficult to see this pattern slowing anytime soon. It's well known that SA will have massive crops but the logistics could still be a bigger problem or hindrance. The only change that has started to take place over the past 5 days is the US crush margins are falling; the March is down nearly 10 cents while the January calculated out at a negative.

The Argentine weather is starting to get some attention as it is warm and turning drier, we would like to point out that just 3 weeks ago we were discussing the fear of acreage lost to too much rain. The overall crop status is still very good and yes maybe Argentina won't produce a 55.0mt bean crop or a 27.0mt corn crop but even taking 10% off of both does change the fact that SA will still have a record production season. The US weather will start to get more attention in coming weeks again and this is more of a concern than SA as dry areas still have not had enough moisture this winter, keep a close eye on this as this could create for some dynamic market activity in coming months. Trade will not wait to see on this, there will be tremendous volatility if weather is even slightly off from normal.

The outside markets are mixed with little significant movement. The DCE closed higher in all markets, the Matif is higher and MDEX is higher.

There was 225 bean deliveries last night by ADM, it's somewhat ironic that they delivered on the last trading day, it's apparent that they really didn't want to deliver anything but even more so they didn't want to pay +50 to buy it back.

The OI in corn fell by 1133, wheat was up 588, beans were down 460, meal increased by 4516 (index purchases is over) oil increased by 528.

The option markets have quickly sucked out the entire premium that was there before the report and is now down to levels that could be worth owning again. The CH is down to 21% with 38 days left and look at the spreads recently; it's all old crop movement. The SH eased to under 20% again, just look at the price activity over the past 48 hours, the flat price has moved more than the entire value of the straddle. The downside bean put skews still have a slight positive slant but not as attractive as last week. The WH remains in the mid 20's and may look high when compared to corn but wheat has the tendency to have some volatile moves during the month of February.